Growth investors hunting for long-term investment themes to profit from should take a look at the Internet of Things (IoT), and specifically so-called "digital twins." They represent one of the most exciting under-the-radar investing ideas for the coming decade. Here's what they are, why they matter, and how you can buy stocks to play the theme.
What are "digital twins"?
In a nutshell, a digital twin is a digital replica of a physical asset. Using IoT sensors and technology, companies can effectively create a twin of an asset -- say, a multimillion-dollar piece of industrial equipment -- and model it. The benefit is that asset managers can better monitor and analyze asset performance, while running simulations on the digital twin in order to improve the physical asset's performance.
The Internet of Things is spurring interest in digital twins. Image source: Getty Images.
With the jargon out of the way, let's get to a real-life illustration. Within the industrial space, the major leader in digital-twin technology is General Electric (GE 4.98%): Its wind turbines, aircraft engines, and gas turbines are a perfect example of physical assets at the forefront of digital-twin technology.
Not only can GE offer IoT solutions to its customers, but it can also use digital-twin technology to cut the unit cost of production on its high-ticket equipment, such as the HA turbine and the LEAP aircraft engine -- a key way to improve its margin.
Keeping aircraft engines and gas turbines working is of huge benefit to operators, because just a few days' downtime can cost millions of dollars in revenue.
Check out the latest GE earnings call transcript.
Digital-twin stocks
GE's IoT businesses will now be run out of an independent company, though it will be wholly owned by GE. But GE Digital is unlikely to move the needle much on GE's near-term profitability.
The best way to play the theme is probably to buy the software companies that facilitate the creation of digital twins. Three names that spring to mind are engineering simulation company ANSYS (ANSS +0.00%), IoT platform provider PTC Inc. (PTC +1.24%) and engineering software company Dassault Systemes (DASTY +2.88%).
Each of these stocks has strong long-term growth prospects, though as you can see below, valuations aren't cheap:
ANSS PE Ratio (Forward) data by YCharts.
ANSYS and PTC
ANSYS engineering simulation software has traditionally been used in high-end and highly specialized applications, but the emergence of digital twins opens up a wider range of markets for the company. With companies increasingly able to use internet-enabled devices to monitor the performance of assets, it becomes increasingly important to be able to simulate behavior accurately. That's where ANSYS comes in.
Interestingly, ANSYS has a partnership with PTC that allows ANSYS engineering simulation solutions to be added to PTC's ThingWorx IoT platform. ThingWorx connects an operator's physical assets with the digital world -- the very essence of the digital-twin concept.
Asset operators can feed information from web-enabled devices into the ThingWorx platform, allowing them to use simulation models such as ANSYS solutions to analyze and predict asset performance. For example, a manufacturing plant involved in a repetitive process could iteratively change and improve performance.
Dassault Systemes
The France-based company's 3DEXPERIENCE solution builds on its expertise in computer-aided design (CAD) software by offering a platform on which companies can create a digital twin, then allow multiple functions to interact with it.
For example, customers can use Dassault's design software on the 3DEXPERIENCE platform to collaborate across company functions as diverse as design, quality control, research, and sales and marketing. The company's strong relationship with the aerospace industry is indicative of its approach to the problem -- both Boeing and Safran have adopted 3DEXPERIENCE. You can think of Dassault's solution as being more focused on design and development of products, while PTC's solution is more about continuous improvement within a manufacturing or asset-utilization environment.
Stocks to buy
GE could benefit immensely from growth in digital twins, but it's still a relatively small part of its overall operations. But ANSYS, PTC, and Dassault Systemes are all worth a close look.
As you can see above, they all trade at nosebleed valuations, but growth companies usually don't come cheap. All it will take is a few years of double-digit revenue growth -- which analysts have penciled in for all three -- and valuations will catch up with their stock prices soon enough.
